Huawei arrest: This is what the start of a tech Cold War looks like

The arrest of a top Huawei executive raises the stakes in the intensifying battle between the United States and China for tech supremacy.

Huawei is one of the world’s biggest makers of smartphones and networking equipment. It is at the heart of China’s ambitions to reduce its reliance on foreign technology and become an innovation powerhouse in its own right.

The country is pumping hundreds of billions into its “Made in China 2025” plan, which aims to make China a global leader in industries such as robotics, electric cars and computer chips. The introduction of 5G wireless technology, which hinges on Huawei, is a top priority.

The United States, meanwhile, has made clear it intends to push back against China’s growing tech power in order to maintain American dominance.

“In the 20th century, steel, coal, automobiles, aircraft and ships — and the ability to produce things in mass quantity — were the sources of national power,” said James Andrew Lewis, director of the Technology Policy Program at the Center for Strategic and International Studies in Washington, in a report this week. “The foundations of security and power are different today. The ability to create and use new technologies is the source of economic strength and military security.”

It’s through that lens that some in the Chinese government view the arrest of Huawei’s chief financial officer, Meng Wanzhou. Meng was detained on December 1 in Canada, at the request of US authorities seeking her extradition.

“The US is trying to do whatever it can to contain Huawei’s expansion in the world simply because the company is the point man for China’s competitive technology companies,” said an editorial Thursday in state-run newspaper China Daily.

Weng’s case could rapidly escalate a broader fight that’s been steadily building. Much depends on the language the United States uses moving forward — and how China ultimately responds. On Saturday, China said Meng’s arrest “severely violated the Chinese citizen’s legal and legitimate rights and interests, it is lawless, reasonless and ruthless, and it is extremely vicious.”

Growing pressure

China’s tech aspirations have garnered concern in the United States for years — especially because Beijing’s goals are seen as relying on the misappropriation of American technology.

President Donald Trump has tried to tackle these issues directly. His administration says that the hundreds of billions of dollars in tariffs it’s slapped on Chinese goods are part of an effort to stop China from stealing US tech. Officials also say that China must stop forcing companies to hand over trade secrets as a condition of market access.

Meanwhile, the United States has targeted Chinese tech companies that rely on US parts.

The Commerce Department in April banned American companies from exporting essential components to ZTE, which the agency said had violated an earlier deal punishing the company for evading sanctions on Iran and North Korea. The high-profile move forced ZTE to halt almost all of its operations for months.

In October, the department issued a similar export ban for state-owned Chinese chipmaker Fujian Jinhua. The US government said it posed “a significant risk of becoming involved in activities that are contrary to the national security interests of the United States.”

At the same time, Chinese President Xi Jinping has been pushing for China’s tech sector to become more self-sufficient by cutting reliance on foreign suppliers.

Turning the spotlight on Huawei, however, adds a new wrinkle. Huawei is a state champion that plays a crucial role in China’s rollout of 5G.

The company has spent heavily on research and development and on marketing its 5G devices. Paul Triolo, the head of global tech policy at risk consultancy Eurasia Group, said it’s the only company in the world right now that can produce all the elements of a 5G network, such as base stations, data centers, antennas and handsets, and put them together “at scale and cost.”

“Xi Jinping says that he wants China to dominate the 5G market globally,” Lewis told CNN Business. “A lot of people see it as the next wave of technology [and think] it will be like the internet or smartphones.”

The Huawei risk

But for Huawei to succeed at building out 5G networks, it needs the United States.

Out of the Huawei’s 92 main suppliers, 33 are US companies, including chipmakers Intel, Qualcomm, and Micron, and software firms Microsoft and Oracle, Tom Holland of Gavekal Research said in a note Friday.

“If Washington now prohibits these companies from selling to Huawei, the Chinese telecoms giant will struggle to survive,” Holland said.

The Meng case, then, has major ramifications. The US government claims that Meng covered up violations of sanctions on Iran, according to Canadian prosecutors, who spoke at Meng’s bail hearing in Vancouver on Friday.

Whether Huawei itself faces legal trouble remains to be seen, though there’s speculation that the company could receive an export ban due to sanctions violations like the one imposed on ZTE.

Such a ban, if enacted, would be catastrophic for the company — and would derail Beijing’s plans to deploy 5G on a large commercial scale by 2020.

“The arrest of Huawei’s CFO in Canada will significantly raise the uncertainty of China’s 5G timing, since any US export ban imposed on Huawei could either delay China’s 5G rollout, or significantly reduce the scale near term,” Jefferies analyst Edison Lee said in a note Friday. Such a ban would force Huawei’s business to “come to a halt,” he added.

In this, the United States has the upper hand. “They’re dependent, so that puts them in a weak position,” Lewis said.

Huawei has already run into problems in the deployment of its 5G technology amid concerns that its devices pose national security risks. New Zealand and Australia have barred Huawei equipment from its 5G mobile networks. UK telecoms group BT said earlier this week that it wouldn’t buy Huawei equipment for the core of its 5G wireless network.

But formally penalizing Huawei could have serious consequences for how the US-China tech fight plays out down the line.

“They’ll accelerate their efforts to become independent, and they’ll look for ways they can ding us,” Lewis said, noting that China could reduce orders of Boeing airplanes, or target US companies for violations of Chinese law. “Their hope is that in 10 years, they won’t need us anymore.”